The Farm CPA

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

Estimated Taxes -- Update

Jan 03, 2012

With Jan. 16, 2012, less than two weeks away, I thought I would update our farmers on their estimated tax requirement and give some examples. As we have previously posted, most farmers work very hard to get their income taxes filed by March 1 of each year since as long as they file their return and pay any tax owed by that date, there is no penalty for not paying estimated taxes.

However, in many cases, I think it would be much better to pay their required tax estimate on Jan. 15 (this year, Jan. 16) and then pay the remaining amount owed on April 15.

The amount owed on Jan. 16, 2012, is the lesser of (1) the 2010 total tax liability less any withholding already paid in for 2011, and (2) the 2011 estimated tax liability, net of any withholding, times 66.667%.

As an example, assume a farmer's tax for 2010 was $10,000. He had a very good year in 2011 and knows that his tax will be at least $100,000. He can either pay this tax on March 1, 2012, or he can pay $10,000 on Jan. 16 and pay the remaining amount on April 16, 2012 (the 15th is on a Sunday this year). Let's assume that he can borrow at 4%.

The interest cost on the $10,000 from Jan. 16 to April 16 is about $100. The interest cost on $100,000 paid on March 1 until April 16 is about $500. In this example, the farmer would be better off by about $400 by just making an estimated tax payment on Jan. 16 and waiting until April 16 to pay the balance. Also, he has an extra 45 days to prepare his tax return and make sure all of his Form 1099s, etc., are correct.

Let's take one more example of possibly the worst case. Assume a farmer has to pay $100,000 of tax this year and his last year's tax was well over that amount. In this case, he needs to pay in $66,667 on Jan. 16 and $33,333 on April 16 or pay $100,000 on March 1. His interest cost on the $66,667 is $667 versus the $500 cost for paying the $100,000 on March 1. He is out-of-pocket about $167, but he still got the extra 45 days to prepare the return. Whoever prepares the books and the tax return would probably like to have the extra 45 days if the cost is only $167.